Profs File Amici Curiae Seeking En Banc Rehearing of Second Circuit Pharma Reverse Payment Antitrust Decision

Professor Mark Lemley

On May 20, 2010, 86 law, economics, public policy and business professors filed an amici curiae brief with the United States Court of Appeals for the Second Circuit seeking the en banc review of the panel decision in In re Ciprofloxacin Hydrochloride Antitrust Litigation, which issued on April 29, 2010. In the per curium panel decision the judges affirmed the district court finding the the ruling in In re Tamoxifen Citrate Antitrust Litigation clearly dispositive, but due to the “exceptional importance of the antitrust implications of reverse exclusionary payment settlements of patent infringement suits,” the panel invited the plaintiffs-appellants to petition the entire Second Circuit for rehearing en banc.

Mark A. Lemley, William H. Neukom Professor, Stanford Law School and partner in the San Francisco law firm Durie Tangri LLP, is representing the 86 professors pursuing this matter pro bono as a concerned law professor and not on behalf of any client. When asked for comment he offered that he thinks “the Cipro case may well be the turning point in legal treatment of reverse settlements.”

The professor brief is short, sweet and to the point.  On behalf of the professors Lemley writes:

I. The Tamoxifen Rule is Bad Policy

The precedent that compelled the outcome in this case contains fundamental errors of economic reasoning that, if widely implemented, would shield many anti-competitive agreements from the reach of antitrust law, causing great harm to competition, U.S. consumers, and (by unjustifiably raising the costs of needed medicines) public health. Under the panel decision in In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 212 (2d Cir. 2006), an agreement between a patent holder and an alleged infringer to settle their patent litigation cannot violate the antitrust laws so long as the patent litigation was not a sham or otherwise baseless and the settlement agreement does not impose restrictions on the alleged infringer that extend beyond the scope of the patent. Such settlements are immune from antitrust scrutiny even if, as here, the patent holder makes a substantial payment to the alleged infringer in exchange for the latter’s promise not to sell the patented product independently during the patent’s lifetime, and even if the patent in question is “fatally weak.” Id. at 211. In so holding, Tamoxifen adopted a rule of near per se legality for a practice akin to a naked market division scheme, a horizontal agreement that seems anticompetitive on its face.

Tamoxifen, moreover, is based on the mistaken premise that (absent fraudulent procurement) a patent grants full immunity from antitrust scrutiny for any and all anticompetitive conduct within the exclusionary power of the patent. The patent grant itself provides only a presumption of validity. The Tamoxifen rule has effectively converted that rebuttable (and oft-rebutted) presumption into an irrebuttable one. By claiming to focus on the “exclusionary zone” of the patent, but ignoring the question of whether the patent was valid in the first place, Tamoxifen falls back on the assumption that the patent holder, by virtue of the patent grant, has an absolute right to enter into a settlement that excludes competitors from the market. But that assumption is false. A patent does not confer a certain legal right. In re Etter, 756 F.2d 852, 856 (Fed. Cir. 1985). Rather, it reflects an initial judgment by the Patent and Trademark Office that the invention is patentable. That judgment is made after only a cursory scrutiny. When a patent is asserted in litigation, accused infringers are entitled to demonstrate that the patent should not have issued. As the Court put it in Lear, Inc. v. Adkins, 395 U.S. 653 (1969):

A patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office. Moreover, the legal conclusion is predicated on factors as to which reasonable men can differ widely. Yet the Patent Office is often obliged to reach its decision in an ex parte proceeding, without the aid of the arguments which could be advanced by parties interested in proving patent invalidity. Consequently, it does not seem to us to be unfair to require a patentee to defend the Patent Office’s judgment . . .

Id. at 670. Virtually every accused infringer asserts invalidity, and nearly half of all patents litigated to judgment are ultimately found invalid. John R. Allison & Mark A. Lemley, “Empirical Evidence on the Validity of Litigated Patents,” 28 Am. Intell. Prop. L. Ass’n. Q.J. 185 (1998). The number is even higher in pharmaceutical cases – an FTC study of all pharmaceutical patent litigation between 1992 and 2000 found that the patent owner lost in 73% of the cases.

Further, the fact that the patent owner must pay the accused infringer a large sum of money to stay out of the market and not to challenge the patent is strong evidence that the parties to the litigation – those with the most knowledge of the facts – see the patent as likely to be held invalid or not infringed. Indeed, the payment in this case was so large – $398.1 million – that it dwarfed the profits the generic manufacturer would expect to receive from successful entry. Put another way, even if it was absolutely certain that the patent was invalid, the patent owner could have paid Barr $398.1 million not to invalidate the patent, and Barr would have been better off taking the money and allowing the patent to remain in force than invalidating the patent. The presence of such a payment may or may not be conclusive evidence that the patent was invalid, but it is certainly evidence that could have led a jury to find that at the time they entered into the settlement, the parties believed the patent was likely invalid.

Tamoxifen recognized that its rule shields troubling settlements from the antitrust laws, but concluded that the policy favoring settlement is so strong that it must extend even to “fatally weak” patents, “even though such settlements will inevitably protect patent monopolies that are, perhaps, undeserved.” Tamoxifen Citrate, 466 F.3d at 211.

We agree that there is a general policy in favor of settlement. We strongly disagree, however, with Tamoxifen’s view that patent settlements must always be encouraged. That view confuses a general policy in favor of settlements that are in the public interest with an endorsement of a particular kind of settlement. The general preference for settlement over litigation must be tempered when settlements have important adverse effects on third parties. Patent litigation serves the crucial role of testing weak patents and protecting the public from monopolies based on invalid patents.

Nor is immunizing exclusion payments necessary to encourage the many settlements that are in the public interest. Both generally and in the pharmaceutical context, patent owners and generic firms can and do settle patent cases without exclusion payments, by agreeing to let the generic company enter in exchange for a license fee, by agreeing to delay entry without a payment, or in other ways that do not involve paying the generic company to forego competition. Indeed, the Federal Trade Commission, to which pharmaceutical patent settlements must now be reported, found 14 agreements settling patent litigation during 2003 and 2004, with none involving an exclusion payment. See http://www.ftc.gov/opa/2005/01/drugsettlement.htm. The fact that pharmaceutical companies can and do settle litigation without exclusion payments shows that there is no need to allow anticompetitive settlements in order to get the social benefits that most settlements provide.

II. The Tamoxifen Rule Is Unprecedented and Conflicts With the Approaches of the Sixth Circuit, the Eleventh Circuit, and the Federal Trade Commission

The Tamoxifen rule is far outside the mainstream of judicial and academic analysis of exclusionary settlements. The Sixth Circuit considers such agreements per se illegal, see In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003), the Federal Trade Commission and the Antitrust Division of the United States Department of Justice both consider them presumptively anticompetitive, see In re Schering Plough Corp., No. 9297 (F.T.C. Dec. 18, 2003), rev’d, 402 F.3d 1056 (11th Cir. 2005), while the Eleventh Circuit applies its own modified version of the rule of reason that inquires into the underlying validity of the patent before characterizing the conduct, see Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003). Only the Federal Circuit has adopted the Tamoxifen approach, and it did so in a case on appeal from a district court in the Second Circuit in which Second Circuit law applied. In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008).

Similarly, although academic commentators are divided on the treatment to be accorded such settlements, they uniformly agree they should not be considered per se legal. Some, including some of the undersigned, have written that settlements involving a large payment from the patent holder to the challenger should be presumptively anti-competitive.  Others have argued for applying the rule of reason or for per se illegality. Other courts and commentators note that the antitrust analysis is more complex for settlements that generate offsetting benefits to consumers, e.g., those involving negotiated entry dates or patent licenses.

The undersigned amici differ in their views on precisely what standard should be applied to judge the legality of exclusionary settlements. We need not resolve those differences in this case because we all agree that exclusionary settlements of patent lawsuits can sometimes violate the antitrust laws. The But none take the position adopted by the Tamoxifen – that the court need not consider the validity of the patent in the antitrust analysis of whether that patent could have excluded a generic competitor from the market, but can instead conclusively presume that validity.

Tamoxifen court took the unprecedented step of concluding that as a matter of law exclusionary settlements can never be illegal unless the underlying lawsuit was a sham. As a result, unless the opinion is reversed case law in the Second Circuit – and perhaps in the country as a whole – will never develop to distinguish pro- and anti-competitive settlements.

Conclusion

We urge the Court to grant review en banc in order to reconsider its decision in Tamoxifen.

Mark A. Lemley
Counsel of Record
William H. Neukom Professor
Stanford Law School
559 Nathan Abbott Way
Stanford, CA 94305
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